Adjustable Rate versus Fixed Rate Mortgages

Choosing the right type of mortgage is vital to getting what you want out of your home purchase, however, many people have difficulty understanding the types of mortgages available and what makes them different.

When you are looking to purchase a new home, you have a lot of options. You also have options when it comes to a mortgage. You will be faced with choosing between a fixed rate mortgage and an adjustable rate mortgage. Each type of loan has benefits; the following information will help you choose between the two.

Fixed Rate Mortgage

With a fixed rate mortgage, you pay the same rate of interest over the life of the loan. This rate is generally based on market rates at the time you apply for the loan. Your interest rate will never fluctuate. This is great for buyers who don't want to be subject to a volatile economy or other conditions beyond their control that can cause a sharp increase in mortgage rates. You have the peace of mind that you will always pay the same interest rate during the time you have the loan. If market interest rates were to increase for a sustained period, this can mean a great savings on your monthly payments, compared to opting for an adjustable rate mortgage.

Adjustable Rate Mortgage

Adjustable rate mortgages have fluctuating interest rates based on current market rates. If the interest rate environment remains low or even rises moderately, you will likely save a lot of money compared with your neighbors who paid more for the “insurance” of taking out a fixed rate mortgage. On the other hand, if the economy were to heat up, causing interest rates to go sky-high, you could pay a lot more in interest over the life of the loan than your neighbors who played it safe with a fixed rate. If you plan to be in the home for the full term of the loan, it may be wise to take a fixed rate mortgage because of the stability over time.

There really is no clear winner in the race between fixed rate and adjustable rate mortgages. The determining factor will be the length of time that you plan to own the home. This piece of information will help you decide the right choice for you. If you plan to be in your home for a short to moderate time, say five to seven years or less, an adjustable rate mortgage is likely the right choice for you. If you plan to stick it out for the full term of the loan and are comforted by knowing what your payment will be, then a fixed rate mortgage would be the logical choice. If you are unsure what your future plans may be, you probably would be best served to choose a fixed rate mortgage to play it safe. Likewise, if your appetite for risk is higher and you believe rates will remain low for the length of time you expect to own the home, then an adjustable rate mortgage might be your cup of tea.

If you have questions about mortgages, or would like to obtain a mortgage loan for the purchase of a new home, Community First can help. We can also help you refinance your existing mortgage to give you a lower payment or interest rate. Give us a call today or stop by and talk with one of our mortgage loan professionals. We can give you the right answers and help you make the choice that is right for your budget and your needs.

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